“It’s hard to conceive of a more destructive national policy (federal student loan policies) – encouraging tuitions to rise and students to avoid productive enterprise while burdening taxpayers with another unsustainable entitlement.”, Wall Street Journal Editorial Board

REVIEW & OUTLOOK

Obama’s Student Loan Blowout

A new study shows how grad schools will soak taxpayers for years.

Sept. 9, 2014 7:27 p.m. ET

Speaking of Dick Cheney (see above), if he had done half the favors for Halliburton that President Obama has done for his former colleagues in academia, the former veep would have been impeached. On Wednesday the New America Foundation will release a study showing how two policies on student loans will combine to force taxpayers to subsidize universities as never before.

The President did not invent the idea of allowing borrowers to pay reduced monthly bills based on income. Nor did he create the concept of forgiving debts for those employed by government or nonprofits. But working first with a Democratic House until 2011 and then administratively, Mr. Obama has expanded benefits to provide free graduate school for generations of academics—and a license for schools to charge the taxpayer whatever they wish.

In an earlier study Jason Delisle and Alexander Holt analyzed hundreds of hypothetical borrower scenarios under the expanded income-based repayment program, which limits payments to 10% of a borrower’s adjusted gross income. (Income below 150% of the federal poverty line is exempt.) The authors found that “the Obama administration’s changes” made the program “much more generous than was commonly understood, particularly for graduate students.”

In their new study to be released Wednesday, Messrs. Delisle and Holt measure how this program will interact with the new and not improved Public Service Loan Forgiveness (PSLF) program, which allows those who go into a Washington-approved profession to be free of their debts after 10 years. It will not be a small population of borrowers standing in line for this gift from taxpayers. The federal government estimates that a quarter of all jobs may qualify.

The subsidies are so generous that the study authors say “it could become common for the government to pay for a student’s entire graduate education via loan forgiveness” if those kids take jobs at a nonprofit or in government. The new payment terms for such borrowers “are unlikely to cause many graduate and professional students to fully repay their loans—even if they earn a competitive salary in their chosen careers or a salary that places them among upper-income Americans.”

A key contribution of the authors is to identify the “zero marginal cost threshold” for various professions. This is the point at which the typical student has already borrowed all of the money he will be required to repay, so that every additional dollar he borrows is likely to be forgiven and is thus essentially free.

Here’s how Messrs. Delisle and Holt put it: “This will likely provide an incentive for graduate and professional students to borrow more rather than less, particularly for some professions. It should also make graduate students less sensitive to the price of a graduate or professional degree, allowing institutions to charge higher tuitions, especially for certain programs like healthcare, social work, education, and government, where borrowers would go on to qualify for PSLF.”

It’s hard to conceive of a more destructive national policy—encouraging tuitions to rise and students to avoid productive enterprise while burdening taxpayers with another unsustainable entitlement.

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Posted on September 10, 2014, in Postings. Bookmark the permalink. Leave a comment.

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